Potentially $135 billion or the political demise of the CFPB.
Ahead of the first face-to-face negotiations between major banks and government agencies over a proposed mortgage servicing settlement, additional information is surfacing over the potential scope and scale of the settlement. An internal presentation by the CFPB to the 50-state Attorneys Generals estimates that mortgage servicers avoided $20 billion in servicing costs by failing to adequately process loan modifications of troubled homeowners, and suggests that a proposed settlement, in addition to or as an alternative to a regulator-imposed penalty, would focus on mandates for principal reduction and short sales for underwater homeowners.
The CFPB estimates that a regulator-proposed $20 billion penalty would have limited effect on the bank’s capital ratios, suggesting that a penalty that size would not adversely affect bank solvency. However, depending on the extent of borrower eligibility for principal reductions (i.e., how much principal is forgiven) and the number of mandated loan modifications, these mandates could cost servicers and banks anywhere between $7 billion to $135 billion. It is unclear whether the major servicer banks could absorb a settlement costing $135 billion, although some have already speculated that the true costs could go beyond these estimates.